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EAI SELECT MANAGERS EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1997
200 Connecticut Avenue, Suite 700, Norwalk, Connecticut 06854-1958
(203) 855-2200
Shareholder Services (800) 798-8055
This Statement of Additional Information relates to EAI Select Managers
Equity Fund (the "Fund"). This Statement of Additional Information is not a
prospectus; it should be read in conjunction with the Prospectus of the Fund
dated April 30, 1997, copies of which may be obtained without charge by
contacting EAI Securities Inc. at 200 Connecticut Avenue, Suite 700, Norwalk,
Connecticut 06854-1958, (203) 855-2200.
This Statement of Additional Information is authorized for distribution to
prospective investors only if preceded or accompanied by an effective
prospectus.
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TABLE OF CONTENTS
INVESTMENT RESTRICTIONS AND OPERATING POLICIES.................. 1
PORTFOLIO TURNOVER.............................................. 3
TRUSTEES AND OFFICERS........................................... 3
CONTROL OF THE FUND ............................................ 7
INVESTMENT ADVISORY AND OTHER SERVICES.......................... 8
TRANSACTIONS IN PORTFOLIO SECURITIES............................ 13
SHARES OF THE FUND.............................................. 15
PURCHASE AND PRICING............................................ 15
FEDERAL INCOME TAX STATUS....................................... 16
PERFORMANCE DATA................................................ 18
FINANCIAL STATEMENTS............................................ 19
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INVESTMENT RESTRICTIONS AND OPERATING POLICIES
Except as described below, the following investment restrictions are
fundamental and may not be changed without the approval of a majority of the
outstanding voting securities of the Fund, as such terms are defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund may not:
1. Invest in securities of any one issuer (other than securities issued
by the U.S. Government, its agencies and instrumentalities), if immediately
after and as a result of such investment the current market value of the
holdings of its securities of such issuer exceeds 5% of its total assets.
2. Invest more than 25% of the value of its total assets in the
securities of companies primarily engaged in any one industry (other than the
United States Government, its agencies and instrumentalities). Such
concentration may occur incidentally as a result of changes in the market value
of portfolio securities, but such concentration may not result from investment.
Neither finance companies as a group nor utility companies as a group are
considered a single industry for purposes of this restriction. (Unless
otherwise provided, for purposes of this restriction, the term "industry" shall
be defined by reference to the Securities and Exchange Commission ("SEC")
Industry Codes set forth in the Directory of Companies Required to File Annual
----------------------------------------------
Reports with the Securities and Exchange Commission.)
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3. Acquire more than 10% of the outstanding voting securities of any one
issuer.
4. Borrow amounts in excess of 33 1/3% of its total assets taken at cost
or at market value, whichever is lower. It may borrow only from banks as a
temporary measure for extraordinary or emergency purposes. It will not
mortgage, pledge or in any other manner transfer any of its assets as security
for any indebtedness.
5. Invest more than 15% of the value of its net assets in illiquid
instruments including, but not limited to, securities for which there are no
readily available market quotations, dealer (OTC) options, assets used to cover
dealer options written by it, repurchase agreements which mature in more than 7
days, variable rate industrial development bonds which are not redeemable on 7
days demand and investments in time deposits which are non-negotiable and/or
which impose a penalty for early withdrawal.
6. Invest in companies for the purpose of exercising control or
management.
7. Purchase or sell real estate; provided, however, that it may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
8. Purchase or sell physical commodities, except that the Fund may
purchase or sell options and futures contracts thereon (subject to Board of
Trustees approval).
9. Engage in the business of underwriting securities issued by others.
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10. Participate on a joint or a joint and several basis in any trading
account in securities. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the management of any
Subadviser in order to save brokerage costs or to average prices shall not be
considered a joint securities trading account.
11. Make loans to any person or firm; provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for investment
of bonds, debentures, notes or other evidences of indebtedness of any
corporation or government entity which are publicly distributed or of a type
customarily purchased by institutional investors (which are debt securities,
generally rated not less than Baa by Moody's or BBB by Standard and Poor's
(although convertible securities may have lower ratings), privately issued and
purchased by such entities as banks, insurance companies and investment
companies), or (ii) the entry into "repurchase agreements."
12. Purchase the securities of other investment companies except where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (a) 3%
of such company's total outstanding voting stock is owned by the Fund, (b) 5% of
the Fund's total assets, taken at market value, would be invested in any one
such company or (c) 10% of the Fund's total assets, taken at market value, would
be invested in all such securities (except for mergers of investment companies).
13. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" (as defined in the 1940 Act) of the Fund,
including the Subadvisers and their affiliates, except as permitted by the 1940
Act and except for the purchase of the Fund's initial assets from certain
investors in The EAI Small Managers Equity Fund Trust.
14. Purchase or retain the securities of an issuer if, to the Fund's
knowledge, one or more of the Trustees or officers of the Fund, or the Manager
or a Subadviser or their directors or officers, individually own beneficially
more than 1/2 of 1% of the securities of such issuer and together own
beneficially more than 5% of such securities.
15. Issue senior securities.
16. Invest more than 35% of its total assets in securities which are not
equity securities; provided, however, that the Fund may at times for defensive
purposes temporarily place all or a portion of its assets in cash, short-term
commercial paper, U.S. Government securities, high quality debt securities and
obligations of banks when, in the judgment of the Manager or a Subadviser, such
investments are appropriate in light of economic or market conditions.
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In addition to the foregoing investment restrictions which may not be
changed without Shareholder approval, the Fund is subject to the following
operating policies which may be amended by the Fund's Board of Trustees (the
"Trustees"). Pursuant to these operating policies, the Fund may not:
1. Invest in real estate limited partnership interests.
2. Invest in oil, gas or mineral leases.
3. Invest more than 5% of its net assets in warrants or rights, valued at
the lower of cost or market, or invest more than 2% of its net assets in
warrants or rights (valued on the same basis) which are not listed on the New
York or American Stock Exchanges.
4. Purchase or sell a futures contract or an option thereon.
5. Purchase securities on margin, except for such short-term credits as
are necessary for clearance of portfolio transactions.
6. Effect short sales of securities.
7. Purchase or sell put or call options.
8. Purchase or sell mortgage-backed debt securities.
9. Borrow cash in amounts in excess of 5% of its total assets taken at
cost or at market value, whichever is lower, except for temporary purposes.
PORTFOLIO TURNOVER
Generally, the Fund purchases securities for investment purposes and not
for short-term trading profits. However, the Fund expects to engage in a
substantial number of portfolio transactions and may dispose of securities
without regard to the timing of such a disposition if, for defensive or other
purposes, such a disposition is, in the opinion of the Subadvisers, in the best
interest of the Fund. It is estimated that the Fund's portfolio turnover rate
will not exceed 200% in any year.
TRUSTEES AND OFFICERS
The Fund is governed by the Trustees, who make broad policy decisions and
exercise general supervision over the operation of the Fund. The Trustees and
officers of the Fund, their addresses, positions with the Fund, ages and
principal occupations during the past five years are listed below.
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Name, Address Position with Principal Occupation During
and Age Fund Past Five Years
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Phillip N. Maisano*+# Trustee and Chief Executive Officer and
200 Connecticut Avenue, President President, Evaluation Associates,
Suite 700 Inc., an investment consulting and
Norwalk, CT 06854-1958 management company (1990-1991);
49 years of age Chief Executive Officer, President
and Director of Evaluation
Associates Holding Corporation
("Holding"), which is the general
partner of EAI Partners, L.P., an
investment consulting and management
company and parent of the Manager,
as defined below (the "Parent");
Vice Chairman, Chief Executive
Officer and Director of Evaluation
Associates Capital Markets,
Incorporated (the "Manager"), an
investment management and consulting
company and investment adviser to
the Fund; Chairman and Director of
EAI Securities Inc. (the
"Distributor"), a registered
broker/dealer and the distributor
for the Fund.
Keith Stransky* Trustee and Senior Vice President, Evaluation
200 Connecticut Avenue, Senior Vice Associates, Inc. (1990-1991);
Suite 700 President Senior Vice President of Holding;
Norwalk, CT 06854-1958 Executive Vice President of the
45 years of age Manager.
Charles Collard@ Trustee Vice President, Airline Claim,
51 JFK Parkway Associated Aviation Underwriters,
Short Hills, NJ 07078 an aviation insurance company.
63 years of age
Neal Jewell@ Trustee Director of Overseas Pensions, AIG,
355 Thornridge Drive a global financial services company
Stamford, CT 06903 (1990-1991); Executive Vice
62 years of age President, AIGAM,a division of AIG
and a registered investment advisor
(1991-1994); retired/part-time
independent consultant; Trustee of
Diversified Investment Portfolios.
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James Schuppenhauer+@ Trustee Associate Vice President Auxiliary
Belmont Abbey College Services, Old Dominion University
100 Belmont Mt. Holly (1978-1992); Vice President
Road Administration and Finance, Belmont
Belmont, NC 28012 Abbey College.
53 years of age
William C. Crerend* Vice President Lawyer with Hughes Hubbard & Reed
200 Connecticut Avenue (1988-1993); Self-employed as
Suite 700 Consultant (1993-1994); Consultant
Norwalk, CT 06854-1958 for the Manager (1994); Senior
34 years of age Counsel of the Manager; Vice
President and General Counsel of the
Parent; Senior Vice President and
General Counsel of and Agent for the
Distributor.
Peter Gwiazdowski Treasurer Employed in Corporate Treasury and
200 Connecticut Avenue Corporate Accounting by FKI
Suite 700 Industries, Inc. (1978-1993);
Norwalk, CT 06854-1958 Self-employed as Certified Public
43 years of age Accountant (1993-1994); Employed
in Corporate Treasury by Dunhill
Temporary Systems (1994); Vice
President and Treasurer of the
Manager.
Elke Bartel Secretary Secretary of the Manager and the
200 Connecticut Avenue Distributor; Senior Vice President,
Suite 700 Secretary and Treasurer of the
Norwalk, CT 06854-1958 Parent.
54 years of age
Thaddeus M. Leszczynski Assistant Vice President and Secretary of
99 Park Avenue Secretary investment companies advised by
New York, NY 10016 Van Eck Associates Corporation and
50 years of age officer of an investment company
adminstered by Van Eck Associates
Corporation; Vice President and
General Counsel of Van Eck
Associates Corporation and Van Eck
Securities Corporation.
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* An "interested person" as defined in the 1940 Act.
+ Member of the Executive Committee - under the Fund's By-laws, has the
authority to conduct the current and ordinary business of the Fund while the
Board of Trustees is not in session.
# Member of the Nominating Committee.
@ Member of the Audit Committee - reviews fees, services, procedures,
conclusions and recommendations of independent auditors.
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The Trustees of the Fund who are not "interested" persons of the Fund (as
defined in the 1940 Act) each receive an annual retainer of $5,000. During the
period from January 2, 1996 (commencement of operations) through December 31,
1996, no Trustee or executive officer of the Fund or any affiliated person of
the Fund received annual compensation from the Fund in excess of $60,000.
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Compensation
From the Fund Benefits Accrued Benefits Upon From the Fund
as Part of Fund Retirement and Fund
Expenses Complex Paid
to Trustees
P.N. Maisano $0 $0 $0 $0
Trustee and
President
K. Stransky $0 $0 $0 $0
Trustee and
Senior Vice
President
Charles Collard $5,000 $0 $0 $5,000
Trustee
Neal Jewell $5,000 $0 $0 $5,000
Trustee
James $5,000 $0 $0 $5,000
Schuppenhauer
Trustee
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CONTROL OF THE FUND
As of January 31, 1997, the following persons or entities beneficially
owned, directly or indirectly, or through one or more controlled companies, more
than 25 percent of the Fund's outstanding shares or otherwise controlled the
Fund:
Percentage of
Name and Fund's Shares State of Parent of
Address Owned Organization Entity
- -------------------------------- -------------- ------------ ---------
Covington & Burling Retirement 37% DC N/A
Savings Plan
1201 Pennsylvania Avenue NW
P.O. Box 7566
Washington, DC 20044-7566
As a result of their ownership of the Fund's shares, the shareholder
listed above could effectively control the outcome of a shareholder vote for the
Fund. The impact of this control is significantly lessened, however, because
the Fund does not expect to hold annual shareholders' meetings and because the
Manager, subject to the oversight of the Trustees, and not the shareholders, is
responsible for the selection and supervision of the Fund's Subadvisers (as
defined below). As noted in the Prospectus, however, the Trustees of the Fund
are required to call a special meeting of the shareholders of the Fund upon
written request of the holders of at least 10% of the outstanding shares of the
Fund, and the shareholders may terminate the Manager or any Subadviser at such a
meeting.
As of January 31, 1997, the following persons or entities owned,
beneficially or of record, 5 percent or more the Fund's outstanding shares:
PERCENTAGE
FUND'S OWNED OF RECORD,
SHARES OWNED BENEFICIALLY OR BOTH
NAME & ADDRESS ------------- ---------------------
--------------
Covington & Burling Retirement Savings Plan 37% Owned of Record and
1201 Pennsylvania Avenue NW Beneficially
P.O. Box 7566
Washington, DC 20044-7566
Retirement Plan for Partners and Employees of 11% Owned of Record and
Day, Berry & Howard Beneficially
CityPlace
Hartford, CT 06103
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Friendly Ice Cream Corp Employee Savings & 9% Owned of Record and
Investment Plan Beneficially
1855 Boston Rd.
Wilbraham, MA 01095-1002
Evaluation Associates 401K Plan 7% Owned of Record and
200 Connecticut Avenue Beneficially
Norwalk, CT 06854-1940
Harding Service Corporation et al Profit 7% Owned of Record and
Sharing Plan & Trust Beneficially
330 South Street
P.O. Box 1975
Morristown, NJ 07962-1975
Institute of Ecosystem Studies 5% Owned of Record
Box AB, Route 144A
Millbrook, NY 12545-0129
All Trustees and officers as a group owned less than 1% of the outstanding
shares of the Fund as of January 31, 1997. Keith Stransky, a Trustee and officer
of the Fund, is Chairman of the Evaluation Associates, Inc. 401(k) Plan and Elke
Bartel, an officer of the Fund, is a trustee of the Plan.
INVESTMENT ADVISORY AND OTHER SERVICES
General
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The Fund is governed by the Trustees, who are generally responsible for the
broad supervision and overall direction of the Fund. The Fund has engaged the
Manager, Evaluation Associates Capital Markets, Incorporated, 200 Connecticut
Avenue, Suite 700, Norwalk, Connecticut 06854, as the investment adviser and
administrative manager of the Fund. The assets of the Fund are managed by asset
managers (the "Subadvisers"), who are selected by the Manager, subject to the
oversight of the Trustees. The Manager also handles the day-to-day
administration of the Fund, which function has, in part, been contracted out to
a third party administrator, as discussed herein.
The Manager selects the Subadvisers and allocates assets of the Fund to the
Subadvisers based on its continuing qualitative and quantitative assessment of
the Subadvisers' skills in managing assets. Unlike many other mutual funds, the
Fund does not depend upon the talents of one investment adviser. Rather, the
Manager selects multiple portfolio managers to manage the assets of the Fund and
allocates the assets among those managers, thereby achieving a diversity in
expertise and investment style that would not be possible if the Fund had only
one investment manager.
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The Manager, the Parent and their predecessors together have more than
twenty years of experience in evaluating investment advisers for individual and
institutional investors.
The Manager allocates the assets of the Fund to the specific Subadvisers.
Each Subadviser has discretion, subject to oversight by the Board of Trustees
and the Manager, to purchase and sell portfolio assets consistent with the
objectives and policies set forth in its particular sub-advisory agreement (the
"Sub-advisory Agreement") and established for it by the Manager. The Manager is
paid a management fee by the Fund for its services, and a certain portion of
that management fee (as set forth below) is forwarded to the Subadvisers as
compensation for their services.
While the Subadvisers are required to make investment decisions for the
Fund independent of any decisions being made for their other clients, the
Subadvisers are likely at times to make similar investment decisions for both
the Fund and their other clients. When a Subadviser makes simultaneous
purchases or sales of securities for both the Fund and one or more of its other
clients, the transactions are, to the extent practicable, averaged as to price
and allocated as to amount between the Fund and the other clients. In some
cases, this averaging and allocation could have a detrimental effect on the
price or volume of a security in a particular transaction as far as the Fund is
concerned, but the Trustees believe that, over time, the ability of the Fund to
participate in large volume transactions should be advantageous to the Fund.
None of the Subadvisers provide any services to the Fund other than
pursuant to their Sub-advisory Agreements and except that a Subadviser or its
affiliated broker-dealer may execute transactions for the Fund and receive a
brokerage commission in connection therewith. In addition, a Subadviser may
serve as a discretionary or non-discretionary investment adviser to one or more
clients of the Manager and its affiliates and to accounts that are not related
to the Manager or its affiliates. Each Sub-advisory Agreement requires the
Subadviser to act fairly and equitably in selecting investments and allocating
investment opportunities, but no Subadviser is required to provide the Fund with
preferential treatment.
The Manager and the Subadvisers
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The Manager is a wholly owned subsidiary of the Parent, which in turn is
owned by its employees and certain non-employee investors. Holding is the
general partner of the Parent. No entity owns more than 25% of the equity in
the Parent. As a whole, the employees of the Parent and its subsidiaries own in
excess of 25% of the equity in the Parent. The following persons are affiliated
with both the Manager and the Fund: Messrs. Maisano, Stransky, Crerend and
Gwiazdowski and Ms. Bartel.
Ownership information as to each of the Subadvisers is as follows:
Bennett Lawrence Management, LLC is controlled by S. Van Zandt Schreiber,
the majority owner of that firm.
Equinox Capital Management, Inc. is controlled by Ronald J. Ulrich, the
majority owner of that firm.
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Iridian Asset Management LLC is controlled by Harold Levy and David
Cohen.
Liberty Investment Management (formerly Eagle Asset Management) is a
division of Goldman Sachs Asset Management, which in turn is a subsidiary of
Goldman Sachs & Co.
Mastrapasqua & Associates, Inc. is wholly owned by Frank Mastrapasqua.
Siphron Capital Management is wholly owned by David Siphron.
The Management Agreement and The Subadvisory Agreements
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The Fund has entered into a Management Agreement (the "Management
Agreement") with the Manager, and the Manager has entered into Sub-advisory
Agreements with each of the Subadvisers. Under the Management Agreement, the
Manager (i) selects, evaluates and terminates the Subadvisers and allocates the
assets of the Fund among the Subadvisers, (ii) supervises the general investment
of Fund assets, (iii) establishes the broad investment strategies for the Fund
and (iv) provides the Fund with certain financial, accounting and statistical
information for the Fund's prospectuses and registration statements.
Under the Management Agreement, the Manager receives 0.92% per annum of the
average of the daily net asset value of the Fund. From this amount, the Manager
pays the following amounts to each of the Subadvisers (expressed as a per annum
percentage of the average of the monthly net asset value of the assets of the
Fund managed by such Subadviser):
Bennett Lawrence Management, LLC - .375%
Equinox Capital Management, Inc. - .375%
Iridian Asset Management LLC - .375%
Liberty Investment Management - .375%
Mastrapasqua & Associates, Inc. - .375%
Siphron Capital Management - .375%
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For the period from January 2, 1996 (commencement of operations) through
December 31, 1996, the Manager received management fees from the Fund totalling
$504,328, net of $303,122 in management fees waived in connection with a self-
imposed fee waiver. (See "Voluntary Fee Waivers and Expense Limitations" below.)
Of that amount, the Manager paid the then-existing sub-advisers as follows:
Bennett Lawrence Management LLC (for the period August 1 to December 31, 1996):
$10,303; Dietche & Field Advisers, Inc.: $98,194; Equinox Capital Management,
Inc. (for the period August 1 to December 31, 1996): $54,670; Hudson Capital
Advisors (for the period January 2 to July 31, 1996): $55,796; Iridian Asset
Management LLC (for the period August 1 to December 31, 1996): $43,086;
Liberty Investment Management (for the period August 1 to December 31, 1996):
$52,080; and Stonehill Capital Management, Inc. (for the period January 2 to
July 31, 1996): $17,234.
The amount of the management fee that will be retained by the Manager may
vary according to the allocation of Fund assets among the Subadvisers.
The Management Agreement with the Manager has been approved by the
Trustees, including the Trustees who are not "interested persons" of the Manager
under the 1940 Act. The Sub-advisory Agreements with the Subadvisers have been
approved by the Trustees, including the Trustees who are not "interested
persons" of the appropriate Subadviser. The Management Agreement and each of the
Sub-advisory Agreements have been so approved for a period to end on June 30,
1997. They will expire unless, prior to June 30, they are extended by the
Trustees or by the holders of a majority of the Fund's outstanding shares. The
Board of Trustees, at its meeting scheduled for May 22, 1997, is expected to
consider extending these Agreements through June 30, 1998. (If the Agreements
are approved by the Trustees prior to June 30, no supplement to this Statement
of Additional Information will be added.) Thereafter, it is expected that the
Management Agreement and each of the Sub-advisory Agreements with the current
Subadvisers will be voted upon by the Trustees on an annual basis.
Any amendment to the Management Agreement requires the approval of the
holders of a majority of the Fund's outstanding shares and of the Trustees. The
Management Agreement may be terminated at any time, without penalty, by the
Trustees or the holders of a majority of the Fund's outstanding shares
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upon not more than 60 days written notice to the Manager. The Management
Agreement will terminate automatically if it is assigned by the Manager.
Any amendment to a Sub-advisory Agreement requires the approval of the
Manager and the Trustees. The Manager may terminate any Sub-advisory Agreement
without penalty at any time, subject to the approval of the Trustees. Each Sub-
advisory Agreement will also terminate automatically if it is assigned unless
the Manager and the Trustees agree to continue such Agreement.
Voluntary Fee Waivers and Expense Limitations
- ---------------------------------------------
The Manager may from time to time, but is not required to, waive all or a
portion of the management fee due to it under the Management Agreement. Any
voluntary fee waiver by the Manager may be terminated or reduced at any time in
the sole discretion of the Manager. Shareholders will be notified of any changes
in such fee waivers at the time they become effective. The Manager has
committed to waive a portion of its fee for the first two years of
operation of the Fund (which ends on January 2, 1998) to the extent necessary to
cap overall annual Fund expenses at 1.15% of the average of the daily net asset
value of the Fund.
Administrative Services and Distribution Arrangements
- -----------------------------------------------------
Pursuant to a portfolio accounting and administrative services agreement,
Van Eck Associates Corporation, 99 Park Avenue, New York, New York 10016, is
responsible for providing administrative and accounting functions to the Fund.
These functions include certain legal, accounting, regulatory and compliance
services, state registration services, corporate secretary and board of trustees
administration, tax compliance services and reporting. Van Eck Associates
Corporation receives an annual fee, payable monthly, at a per annum percentage
of the average daily net asset value of the assets of the Fund. The annual fee
is graduated, beginning at .20% of the average daily net assets of the Fund if
such assets during the month the fee is calculated are less than $100 million
and ending at .12% of the average daily net assets of the Fund if such assets
during the month the fee is calculated are equal to or more than $260 million.
There is a minimum annual fee of $100,000 payable to Van Eck Associates
Corporation. For the period from Janaury 2, 1996 (commencement of operations)
through December 31, 1996, Van Eck Associates Corporation received fees of
$175,533.
The Distributor, a wholly owned subsidiary of the Parent, serves as
distributor in connection with the offering of the shares and acts as agent in
arranging the sale of the shares. The Distributor or its affiliates (other than
the Fund) bear the expenses associated with the distribution of the shares,
including all advertising and promotional expenses.
Custodian, Transfer Agent, Independent Accountants and Counsel.
- --------------------------------------------------------------
Boston Safe Deposit and Trust Company, One Boston Place, Boston,
Massachusetts 02108, (the "Custodian") acts as custodian for the Fund and is
responsible for (i) holding all cash assets and portfolio securities of the
Fund, (ii) releasing and delivering the Fund's securities as directed by the
Fund or the Subadvisers, (iii) collecting all dividends, distributions and other
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payments due to the Fund and (iv) making all payments due from the Fund. The
Custodian is authorized to deposit securities in securities depositories or to
use the services of sub-custodians to the extent permitted by and subject to the
regulations of the Securities and Exchange Commission.
DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105-1802, serves
as transfer, dividend disbursing and shareholder servicing agent for the Fund.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, are the independent accountants for the Fund.
Day, Berry & Howard, One Canterbury Green, Stamford, Connecticut 06854, as
counsel to the Fund, has rendered opinions on the validity of the Shares which
were filed with the Securities and Exchange Commission as an exhibit to the
Fund's registration statement. Day, Berry & Howard represents the Parent, the
Manager and certain of their affiliates in matters not related to the Fund. In
addition, the Retirement Plan for Partners and Employees of Day, Berry & Howard,
of which certain members of Day, Berry & Howard are beneficiaries, had invested
approximately $9.7 million in the Fund as of January 31, 1997.
TRANSACTIONS IN PORTFOLIO SECURITIES
Each Sub-advisory Agreement provides that the principal objective of each
Subadviser in executing portfolio transactions is to achieve the best price and
execution available. Most portfolio transactions are expected to be effected in
the primary markets, and in assessing best price and execution, the Subadvisers
are expected to evaluate a number of considerations, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer selected to execute the
transaction and the reasonableness of any commission paid to that broker or
dealer.
As stated in the Prospectus accompanying this Statement of Additional
Information, in certain instances, the Fund may enter into directed brokerage
arrangements in which it will direct the brokerage for certain securities
transactions to be entered into by its Subadvisers to a certain broker-dealer in
exchange for that broker-dealer's agreement to pay a portion of the custodian,
transfer agent or other administrative fees incurred by the Fund. Directed
brokerage transactions will only be executed if, in light of the offsetting
reduction in administrative fees to be incurred by the Fund, they represent the
best execution and price for that transaction or as good execution and price as
would otherwise be available. No directed brokerage arrangement
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will be effected at any time that the Manager has waived all or a
portion of its management fee under the Management Agreement, in accordance with
the requirements of the 1940 Act and the rules thereunder.
In addition to the directed brokerage arrangements described above, the
Subadvisers, in assessing best price and execution, are authorized to consider
the "brokerage and research services" (as defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended), statistical quotations
(particularly the quotations necessary to calculate the Fund's net asset value)
and other information provided to the Fund, the Manager or a Subadviser by a
specific broker-dealer. Moreover, the Subadvisers are authorized to direct the
Fund to pay a commission to a broker-dealer that is greater than the commission
which would be paid to another dealer executing the same portfolio transaction
if the Trustees, the Manager or such Subadviser determines in good faith that
the higher commission is reasonable in light of the brokerage and research
services provided by that broker-dealer. For the period from January 2, 1996
(commencement of operations) through December 31, 1996, the Fund paid brokerage
commissions totalling $383,941 on purchases and sales of portfolio securities.
Of that amount, $57,826, or 15.1%, was paid to broker-dealers providing research
services.
The Trustees from time to time review the brokerage commissions paid by the
Fund to determine whether such commissions are reasonable in light of the
directed brokerage arrangements described above or in light of the brokerage and
research services provided to the Fund by the applicable broker-dealers.
The Subadvisers may receive brokerage and research services from broker-
dealers executing Fund portfolio transactions which primarily benefit one or
more other accounts for which the Subadviser exercises investment discretion.
The fees of the Subadvisers are not reduced by reason of their receipt of those
services.
The Subadvisers generally do not provide services other than investment
management services to the Fund. However, a Subadviser or its affiliated
broker-dealer may execute portfolio transactions for the Fund (either for
transactions managed by it or for transactions managed by another Subadviser)
and may receive a brokerage commission for such transactions in accordance with
Section 17(e) of the 1940 Act and procedures adopted for such transactions by
the Trustees pursuant to rules thereunder. No such affiliated brokerage
transactions were effected during the period from January 2 through December 31,
1996. Neither a Subadviser nor its affiliated broker-dealer may act as a
principal in a transaction involving the Fund.
In allocating portfolio transactions among broker-dealers, a Subadviser
may, but is not required to, consider any sales of shares of the Fund by a
particular broker-dealer or its affiliate.
The Fund may purchase securities of its regular broker-dealers or their
parents.
<PAGE>
-15-
SHARES OF THE FUND
The Fund offers one class of Common Shares. The Fund does not have any
securities other than its Common Shares.
Income dividends will normally be paid on Fund shares on an annual basis in
each December or January. Distributions of any capital gains are normally paid
annually in December or January. Unless a shareholder has elected to receive
dividends and distributions in cash, all dividends and distributions will be
reinvested in additional shares of the Fund (at net asset value at the time of
reinvestment). Any election may be changed at any time by delivering written
notice to the Fund at least ten business days prior to the payment date.
Shares of the Fund are entitled to one vote per share. Shareholders have
the right to vote on the election of the Trustees and on all other matters on
which, by law or by the Fund's Declaration of Trust, they may be entitled to
vote. There are no cumulative voting rights; accordingly, the holders of more
than 50% of the outstanding shares could elect all of the Trustees. The Fund is
not required, and does not intend, to hold annual meetings of shareholders under
normal circumstances. The Trustees or the shareholders may call special
meetings of the Shareholders for action by shareholder vote, including the
removal of any or all of the Trustees. Trustees will call a special meeting of
shareholders of the Fund upon written request of the holders of at least 10% of
the outstanding shares.
The Fund's shares do not have liquidation rights, preemptive rights or the
right to convert to another security. The shares are not subject to further
calls or to assessments by the Fund.
PURCHASE AND PRICING
Shares in the Fund are offered through the Distributor on a continuous
basis with a minimum initial investment in the Fund of $500,000 and a minimum
additional investment of $1,000. These minimums may be waived by the Fund or the
Manager in certain circumstances. The shares in the Fund are sold at the net
asset value per share next computed after the purchase order is received in
proper form by the Transfer Agent.
As stated above, the shares are sold at net asset value per share. Net
asset value per share is determined as of the close of business on the New York
Stock Exchange, generally 4:00 p.m. New York time, on each business day. Net
asset value per share is equal to the net worth of the Fund (assets minus
liabilities) divided by the number of shares outstanding. Assets and liabilities
are determined in accordance with generally accepted accounting principles and
applicable rules and regulations of the Securities and Exchange Commission.
<PAGE>
-16-
Securities held by the Fund which are traded on a national exchange are
valued based on the last quoted sale price on such exchange on or recently
before the valuation date (or if the securities are traded on more than one
exchange on or recently before the valuation date, the principal exchange that
such securities are traded on, as determined by the appropriate Subadviser) or,
if there has been no recent sale of securities, at the last bid price. Over-
the-counter securities for which market quotations are readily available are
valued on the basis of the last sale price or, lacking any sales, at the last
quoted bid price. Securities and other investments for which market quotations
are not readily available are valued at fair value, as determined in good faith
by the appropriate Subadviser and pursuant to procedures established by the
Trustees.
FEDERAL INCOME TAX STATUS
The Fund has elected and qualified and intends to qualify each year to be
treated as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify as a
RIC for any taxable year, the Code requires that, for that taxable year: (i) at
least 90% of the Fund's gross income be derived from dividends, interest,
payments with respect to securities loans, gains from the disposition of stock,
securities and foreign currencies and other income derived from the Fund's
business of investing in stock, securities and currencies; (ii) less than 30% of
the Fund's gross income be derived from gains from the disposition of stock,
securities, options, futures, forward contracts and certain investments in
foreign currencies held by the Fund for less than three months; (iii) the Fund
distribute at least 90% of its dividend, interest and certain other taxable
income ("Investment Company Taxable Income") and 90% of its net tax-exempt
interest income; (iv) at the end of each fiscal quarter, at least 50% of the
value of the Fund's total assets be maintained in cash, U.S. Government
securities, securities of other regulated investment companies and stock or
other securities that represent, with respect to any one issuer, no more than 5%
of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer; and (v) at the end of each fiscal quarter, no more
than 25% of the value of the Fund's total assets be invested in the securities
(other than those of the U.S. Government or other RICs) of any one issuer, or of
two or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses.
The Fund is subject to Federal income tax as a corporation on its
Investment Company Taxable Income, but, for any year in which the Fund qualifies
as a RIC, it is allowed a deduction based on dividends paid to shareholders in
computing such amount. If for any year the Fund does not qualify as a RIC, all
of its taxable income for the year will be subject to Federal income tax without
a deduction for dividends paid to shareholders, and such distributions will be
includable in gross income by the shareholders entitled to payment thereof to
the extent of the Fund's current and accumulated earnings and profits. The Fund
intends to pay sufficient dividends to avoid liability for Federal income tax
and accordingly does not expect to incur Federal income tax. It may not,
however, be possible for the Fund to avoid this tax for all taxable years.
If at any time during the last half (July 1 through December 31) of a
taxable year of the Fund more than 50 percent of the Fund's outstanding shares
are owned, directly or indirectly, by or for not more than five individuals
(which for purposes of this analysis includes employee
<PAGE>
-17-
pension and benefit plans like those presently investing in the Fund and certain
other entities), the Fund would be a personal holding company ("PHC") under
Subchapter G of the Code for such taxable year. For any year that the Fund is a
PHC and incurs liability for Federal income tax, the amount of that liability
will be computed at the highest rate applicable to corporations. For any year
that the Fund is a PHC, it will also be subject to a 39.6% personal holding
company tax (in addition to any Federal income tax or other taxes to which it
may be subject) on any undistributed personal holding company income. The Fund
was a PHC for its 1996 taxable year, but it made sufficient distributions to
avoid liability for personal holding company tax. It may not, however, be
possible for the Fund to avoid this tax for all taxable years in which it may be
a PHC.
If the Fund qualifies as a RIC but does not meet certain distribution
requirements, the Fund will be liable for a 4% non-deductible excise tax on
certain undistributed amounts. The Fund intends to comply with those
distribution requirements and accordingly does not expect to incur this excise
tax. The Fund was a RIC for its 1996 taxable year, but it made sufficient
distributions to avoid liability for this excise tax. It may not, however, be
possible for the Fund to avoid this tax in all instances.
The Fund may invest in obligations (such as zero coupon bonds) that are
issued with original issue discount ("OID"). OID income is accrued and included
in Investment Company Taxable Income even if the Fund does not receive any cash
from such obligations. Accordingly, the Fund may need to sell some of its
assets in order to satisfy the distribution requirements applicable to RICs.
The Fund may also invest in other investment vehicles, including other RICs,
that in turn invest in stock and other securities issued by foreign issuers.
Dividends and other income derived from such foreign issuers may be subject to
withholding of foreign taxes, which would reduce the amount ultimately received
by the Fund.
Dividends (other than capital gain dividends and exempt-interest dividends)
by the Fund, including those distributing any net short-term capital gains, to
shareholders subject to Federal income tax thereon will be taxable as ordinary
dividend income. Capital gain dividends (distributed from a year's excess of net
long-term capital gains over net short-term capital losses) to shareholders
subject to Federal income tax thereon will be taxable as long-term capital gains
regardless of how long shareholders have held their shares. These provisions
apply regardless of whether dividends are distributed in cash or shares. Any
loss realized upon the redemption of shares not more than six months from the
date of acquisition will be treated as a long-term capital loss to the extent of
any capital gain dividends during that six-month period. No loss will be allowed
on the sale or exchange of shares of the Fund to the extent the shareholder
acquires (including through an automatic reinvestment of dividends), or enters
into a contract or option to acquire, other shares or substantially identical
stock or securities within the 61-day period starting 30 days before the sale or
exchange of the shares sold or exchanged.
If for any taxable year the Fund complies with certain requirements,
corporate shareholders may be entitled to a dividends-received deduction for
all, or a portion of, dividends paid by the Fund (other than capital gain
dividends) that are attributable to dividends received by the Fund from domestic
corporations.
<PAGE>
-18-
Within 60 days of the end of the Fund's taxable year, the Fund will notify
shareholders of the amounts and tax status of dividends and distributions from
the Fund. Under Federal income tax laws, the Fund must report to the Internal
Revenue Service (the "IRS") all distributions of taxable income, including
capital gains, and gross proceeds from redemptions received by all shareholders
not exempt from that requirement. If a shareholder required to provide the Fund
with its correct taxpayer identification number or required certification does
not do so, or if the IRS notifies the Fund that a shareholder may not be in
compliance with the backup withholding rules, the Fund will be required to
withhold from such shareholder's distributions and redemption proceeds Federal
income tax at a rate of 31%, and amounts paid to the shareholder will be reduced
accordingly.
Dividends and other distributions from the Fund may also be subject to
state and local taxes. Shareholders should consult with their tax advisers
concerning the state and local tax consequences of investing in the Fund.
As stated in the Prospectus, shares of the Fund may be acquired in exchange
for securities held by an investor which are acceptable to the Fund. If one or
more investors were to effect such an in-kind purchase in exchange for 80% or
more of the Fund's shares, the Fund's basis for the securities it accepts from
an investor could be that investor's basis therefor, and the investor's basis
for the Fund's shares acquired in the exchange could be the investor's basis in
the securities exchanged therefor. If that basis is less than the fair market
value of the securities at the time of the exchange, the potential tax liability
of the investor with respect to the sale or other disposition of the Fund's
shares acquired in the exchange would be increased, as would the potential tax
liability of the Fund or its shareholders with respect to capital gains realized
by the Fund in connection with such securities.
The foregoing is a general and abbreviated discussion of U.S. Federal
income tax consequences of investing in the Fund. Non-U.S. investors should
consult with their tax advisers concerning the tax consequences of owning shares
of the Fund, including the possibility that distributions may be subject to
withholding of Federal income tax at a rate of 30% (or a reduced rate if
provided by treaty). All investors, including any subject to special income tax
treatment applicable to entities of their type, are encouraged to consult with
their tax advisers for more information concerning the Federal, foreign, state
and local tax rules applicable to ownership and disposition of shares of the
Fund by them.
PERFORMANCE DATA
Total Return Computations
- -------------------------
The Fund may include in advertisements or sales literature certain total
return information. For such purposes, total return equals the total of all
income and capital gains paid to holders of shares of the Fund, assuming
reinvestment of all distributions, plus (or minus) the change in value of the
original investment, expressed as a percentage of the purchase price. For the
period beginning with the commencement of the Fund's operations on January 2,
1996 (commencement of operations) and ended on December 31, 1996, the Fund's
average total return was 14.3%.
<PAGE>
-19-
Average annual total return is computed by finding the average annual compounded
rates of return over the periods that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1+T)/to the nth power/=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5, or 10 year periods at
the end of the year or period;
The calculation assumes all dividends and distributions by the Fund are
reinvested at the price stated in the prospectus on the reinvestment dates
during the period, and includes all recurring fees that are charged to all
shareholder accounts.
The Fund may also advertise performance in terms of aggregate total return.
Aggregate total return for a specifed period of time is determined by
ascertaining the percentage change in the net asset value of shares of the Fund
initially acquired assuming reinvestment of dividends and distributions and
without giving effect to the length of time of the investment according to the
following formula:
[(B-A)/A](100)=ATR
Where: A = initial investment
B = value at end of period
ATR = aggregate total return
Volatility Computations
- -----------------------
As stated in the Prospectus, the Fund may include in advertisements and
sales literature certain quantifications of the historical volatility of the
performance of the Fund as the standard deviation of such performance. Standard
deviation is calculated using a typical standard deviation formula.
Performance Comparisons
- -----------------------
As described in the Prospectus, the Fund may include in advertisements or
sales literature comparisons of Fund performance to the performance of other
mutual funds having similar structures and/or objectives. Such comparisons may
be expressed as a ranking prepared by independent services or publications. In
addition, the Fund's performance may be compared to that of various unmanaged
indices, including the S&P 500 and the NASDAQ Composite.
FINANCIAL STATEMENTS
The financial statements for the Fund for the period from January 2, 1996
(commencement of operations) through December 31, 1996, with related footnotes,
are included in the Fund's Annual Report to Shareholders for the period from
January 2, 1996 (commencement of operations) through December 31, 1996, filed
with the Securities and Exchange Commission, and are incorporated herein by
reference.
